Legacy IP Revenue Will Erode Amid AI And Geopolitical Headwinds

Key Takeaways

• Disruptive technologies and open access trends threaten IPH's traditional service model, reducing demand, compressing margins, and contracting its addressable market.
  
• Geopolitical shifts, client consolidation, and commoditization heighten operational complexity, intensify pricing pressure, and undermine scalability and earnings stability.
  
• Sustained growth in Asian and ANZ operations, strong cash flow, successful integration of acquisitions, and favorable industry trends position IPH for improved long-term performance.

Catalysts

Provides intellectual property (IP) services and products.

• The accelerating adoption of AI and automation tools in intellectual property management directly threatens IPH's traditional service model, which could significantly diminish future demand for high-margin human expertise, compressing both revenue and net margins over the long term.
  
• Intensifying global support for open access and alternative IP models, combined with the risk of lower patent and trademark filings, is poised to contract IPH's total addressable market and impede organic revenue growth and earnings resilience across key regions.
  
• Geopolitical shifts toward protectionism and regional fragmentation of IP regimes can increase regulatory and operational complexity, limiting the effectiveness of IPH's multi-jurisdictional scale while raising compliance costs and eroding both operating leverage and profit margins.
  
• Client consolidation-particularly among large corporates-alongside rising cost sensitivity, is expected to create persistent downward pricing pressure across IPH's core segments, leading to structurally lower revenue growth and the compression of group-wide net margins despite past acquisitions.
  
• The ongoing commoditization of IP services, fueled by aggressive competition from technology-enabled, lower-cost providers and growing insourcing by larger clients, threatens to undermine IPH's pricing power and scalability, resulting in lower fee income, declining retention, and increased volatility in earnings.

IPH Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on IPH compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming IPH's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.4% today to 15.3% in 3 years time.
• The bearish analysts expect earnings to reach A$111.1 million (and earnings per share of A$0.4) by about July 2028, up from A$77.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, up from 17.2x today. This future PE is greater than the current PE for the AU Professional Services industry at 17.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

IPH Future Earnings Per Share Growth

Risks

• The ongoing recovery in Asian operations, marked by 10% growth in patent filings, is supported by increasing activity in sectors like 5G, AI, and telecommunications, which could signal a return to sustained revenue and EBITDA growth in this high-potential region.
  
• The successful completion and integration of major Canadian acquisitions, along with cost synergies tracking above initial estimates, provide opportunities for higher earnings and improved net margins as efficiency gains and cross-selling start to be realized across the enlarged group.
  
• IPH continues to generate strong cash flow with a 100% cash conversion ratio and a reduction in net debt and leverage, enabling increased dividends and share buybacks, which may both bolster earnings per share and support long-term share price appreciation.
  
• The group maintains a market-leading position in Australia and New Zealand and has demonstrated resilience with three consecutive periods of organic growth in these regions, even in the face of lower market-wide patent filings, indicating that recurring annuity-like revenues can underpin steady financial performance.
  
• Structural industry trends such as rising global demand for IP protection tied to digital transformation and the growing importance of intangible assets support multiyear growth in IP filings, enhancing the long-term revenue outlook for IPH given its regional scale and diversified brand portfolio.

Valuation

• The assumed bearish price target for IPH is A$5.25, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of IPH's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$8.45, and the most bearish reporting a price target of just A$5.25.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$727.4 million, earnings will come to A$111.1 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$5.08, the bearish analyst price target of A$5.25 is 3.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.